The University of Edinburgh has proposed a number of changes to its defined benefit pension fund to make the scheme more affordable and sustainable, as its deficit has risen by a quarter.
Pre-1992 institutions, including the University of Edinburgh, generally use the Universities Superannuation Scheme for academic and senior administrative employees, and have a self-administered pension fund for support staff.
There may be an advantage if moving from RPI to CPI means the employer can continue to provide DB benefits
Jonathan Seed, Xafinity
The university’s proposals include an inflation index switch from the retail price index to the consumer price index. The university also wants to increase the normal retirement age, aligning it with the state pension age.
Other proposed changes include adjusting the pension accrual rate and increasing member contributions.
Dealing with the deficit
Charlie Jeffery, professor of politics and senior vice-principal at the university, explained that the pension scheme’s deficit jumped to £71m from £56m between 2012 and 2015.
“What this means is that changes need to be made to try to plug this deficit and stop it getting any bigger,” he said.
A consultation on the proposed changes began in August this year, and the university hopes to implement the revisions to the scheme in December.
The university has told members that, in addition to addressing the deficit, it wants to “create a scheme that is sustainable in the long term” and “ensure comparability with other universities and [the] local market”.
Cutting costs while reducing risk
Alex Waite, a partner at consultancy LCP specialising in corporate advice, said that the changes to indexation and retirement ages were “both very sensible indeed”.
He said the modifications reduce cost and risk for the university, with CPI a better measure of inflation than RPI and the state pension age a “more appropriate” retirement age.
Members might feel differently about the change, he acknowledged.
“I would expect members to feel that they are getting a lower level of benefit for a higher level of contribution, payable from a later age,” he said.”
However, he pointed out that past benefits are protected and members will still be getting “a really good pension”.
RPI to CPI
Similarly, Jonathan Seed, director at consultancy Xafinity, said that when a scheme switches from RPI to CPI, “from the member’s perspective, the pension income would be lower”.
However, he said there may be an advantage if moving from RPI to CPI means the employer can continue to provide DB benefits.
The advantages of a switch to CPI include cost-saving and consistency with USS provision, he said.
Seed noted that if there is a trend, it is to move in line with changes to USS, where a career average revalued earnings system was introduced for new joiners in 2011.
He said: “Institutions will be looking at further design changes to control overall costs. These will include changes to accrual rates, member contributions, retirement age [and] pension increases.”
In some cases, institutions will be able to maintain existing benefits, but Seed said more consideration of DC provision by university pension schemes is to be expected.
“The question is to what extent and how this interacts with existing DB provision.”
National Milk Records cuts £6.2m with CPI switch
The National Milk Records pension fund has cut £6.2m from its deficit following a switch from RPI to CPI as a means of calculating inflation-related adjustments to the fund.
Alastair Meeks, partner at law firm Pinsent Masons, said switching from RPI to CPI is being seen “far and wide” and is not specific to the university sector.
“It’s becoming increasingly seen as something that’s appropriate for a decent employer to be considering,” he said.
